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Asian Vulnerability, Then and Now

August 29, 2013 10:15 amAugust 29, 2013 10:15 am

Still working on the crisis du jour, the markets’ sudden turn against emerging economies. The big question here is how serious this really is — is it the kind of thing that costs a few finance ministers
their jobs and maybe causes mild recessions when central banks hike rates, or is it a potential economic catastrophe?

It’s important to understand that this is not at all the same question as asking whether the economies in question have deep structural flaws, lousy infrastructure, inferior politicians etc.. You can have all
that and still skirt serious recession; you can also have a wonderfully innovative and efficient economy and suffer business cycle disaster (see America, 1929).

My take is still that the risks of real disaster are low. Here’s why. This site conveniently has a chart showing Indonesia’s external
debt as a share of gross national income (not exactly the same as GDP, but close enough):

Photo

Indonesia: External debt as % of GNICredit Indexmundi

You see fairly elevated levels in the mid-1990s, then the ratio soars in the crisis. That’s the infamous devaluation/balance sheet effect: Indonesia’s private sector had lots of debt in dollars, so when
the markets turned and the rupiah plunged, that debt ballooned relative to income and assets, causing a severe real-side crisis.

But as you can also see, Indonesia has a much lower debt ratio now — about half what it was in the mid-90s.

What about India? I’ve already noted that its external debt level is relatively low — lower than Indonesia now, let alone Indonesia in the 90s:

Now, it’s possible that I and everyone else who tried to understand what happened in the 90s has the wrong model. But given what we know, I’m relatively though not totally calm.